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20 Period Moving Average In A Nutshell
Moving averages are a dependable tool, but it is important to know what lengths to use and when. For the 20 period moving average, you would want to use this for the short to medium lengths in time. If you trade longer lengths of time, a 20 period moving average may only give you a portion of the data you really need. Some of the risks of using a moving average is just that, it is an average and has the ability of being wrong. Moving averages are useful in giving you an idea of where the market should be, but may not give you a spot on answer.
A way people use this tool to trade or invest is simple, when the markets extend to far above the moving average, they will look to sell or short the equity they are trading or investing in. On the other side, if the market begins to fall far below the moving average, investors and traders will look to purchase the stock, as it will likely return to the average levels.
When looking for a tool that can help you determine where the market may go, the 20 period moving average certainly is a must. A 20 period moving average takes the last 20 bars of data, which could be as small as one minute, all the way to monthly candles, and will provide you with an average of those 20 periods. Having this tool on your charting will allow you to see how far the market is moving from the average of the last 20 periods. This is of significance because if the market begins to move drastically in one direction, you can have the knowledge that it should return to the average sooner rather than later.
Closer Look at 20 Period Moving Average
Some alternatives to using the 20 period moving average are the 50, 100, or 200 period moving average, which give you smoother average the farther you go out, due to the data that is being used. An average over 200 periods is likely to be smoother than a moving average using only 20 periods. Be sure to use the different variations and decide which on fits your needs best. Moving averages are a great tool to ballpark where the market should be and when it may become over extended or over sold.